What collateral can a seller register against the buyer in a business sale?

A seller who accepts part of the price over time holds a loan, and without security that seller is an unsecured creditor. Security gives the seller a claim on particular property. What can be taken depends on what the buyer owns and whether the deal is an asset sale or a share sale. BDC notes that a financing structure may combine the buyer’s own investment, a business loan and seller financing.

Business assets in an asset sale

In Ontario, the Personal Property Security Act covers security over personal property, which it defines to include goods, intangibles, money and investment property. In an asset sale that can mean the equipment, inventory, receivables and intangibles the buyer has just bought, and a security agreement may cover after-acquired property as well. Security taken to secure the price of the collateral sold is a purchase-money security interest, which under Ontario’s Personal Property Security Act, for collateral other than inventory, outranks other security interests in the same collateral given by the same debtor if perfected before or within 15 days after the buyer, or a third party at its request, obtains possession or, for an intangible, after the interest attaches.

Shares and land

If the buyer is purchasing shares, the shares can be the collateral. The Act defines investment property to include a security, as defined in the Securities Transfer Act, 2006, and a security interest in it can be perfected by control as well as by registration. Its purchase-money definition excludes investment property, so the 15-day rule above does not help a seller whose collateral is such a security. Land is different: the Act does not apply to the creation or assignment of an interest in real property, including a mortgage, charge or lease, subject to stated exceptions such as fixtures, so security over real estate needs a mortgage under the real property rules.

Registration and the bank’s priority

Under Ontario’s Act, registration perfects a security interest in any type of collateral. Until perfected, a security interest generally ranks behind a perfected one in the same collateral and is not effective against a trustee in bankruptcy. Ontario’s registry is reached through Access Now; Alberta, British Columbia and Quebec keep their own. Where an after-acquired clause in a general security agreement or universal movable hypothec held by the lender or another creditor reaches the assets a CSBFP loan finances, the program guidelines require the lender to obtain the postponements of rank needed for first-rank security. They also exclude a vendor-financed amount from a program loan, and Ontario’s Act lets a secured party subordinate its security interest, effective according to its terms. A PPSA search shows who already holds a claim.